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Kenya Politics September 2017

Kenya: Economic woes intensify as the country gears up for an election re-run in October

September 19, 2017

Kenya’s economic ordeals continue to worsen following the Supreme Court’s decision on 1 September to nullify the results of the 8 August vote and hold an election re-run. Deferred focus on economic policy, overshadowed by prolonged political uncertainties, will exacerbate an already challenging economic situation, which has been under severe strain since the start of the year due to an ongoing drought in the north of the country. The country’s trials are likely to persist and weigh heavily on economic performance going forward.

The re-run, scheduled for 17 October, followed a legal challenge to President Uhuru Kenyatta’s victory by the main opposition party led by Raila Odinga. In a ruling backed by four out of six judges, the Supreme Court found that irregularities and illegalities had botched the credibility of the outcome, with a mismatch found between the final vote count and the results declared at polling stations. In a decision that sets a historic precedent, the Court stated that Kenya’s national electoral commission—the Independent Electoral and Boundaries Commission (IEBC)—had “failed, neglected, or refused to conduct” the presidential election in accordance with the constitution.

The unexpected verdict set off jitters in financial markets, and trading was suspended for a brief period after the Nairobi Stock Exchange 20 Share Index—which comprises the country’s most heavily traded stocks—saw more than 5% of its value wiped off in panic selling. With only a few weeks until the re-run, tensions are running high over the integrity of the upcoming vote, and if it will even proceed according to schedule, as the electoral commission is mired in infighting over who to pin the blame for the failure of the most expensive election in the country’s history. Moreover, the opposition party has vowed that it will not participate in the re-run unless major reforms are instituted in the electoral commission. Amid the unending political saga, the stock market has been hurled into a downward trend over the past month.

While uncertainties prevail on the political front, the economy will continue to suffer. Reduced economic activity due to falling domestic and external demand amid amplified political tensions, high inflation and rising unemployment are being compounded by the impact of the devastating drought and have already severely dented economic activity. The economy expanded at a weaker pace of 4.7% in Q1, down from 6.1% in Q4 2016, derailing the previous year’s strong growth momentum. Recent data indicates the economic picture becoming bleaker: The PMI contracted for a fourth consecutive month, slumping to an all-time low in August, as the worsening drought stokes fears of a famine.

Deteriorating prospects prompted panelists to downgrade their GDP growth forecasts for the eighth consecutive month in September. The panel projects growth of 4.8% in 2017, which is 0.1 percentage points below last month’s forecast, and expects growth to accelerate to 5.3% in 2018, which is down 0.2 percentage points from previous month’s forecast.

The possibility of a recovery this year seem far out of sight as political uncertainties persist and social unrest is likely to linger. The U.S. recently issued a travel alert to Kenya over possible violence ahead of the election re-run, and other countries are likely to follow suit. Another contest to the results, with a further stretch in uncertainties, would be calamitous for the economy. Even in the event that the victory is upheld, measures to revive growth will take time to come into play and are unlikely to translate into a stronger economic course this year. Stéphane Colliac, Senior Economist at Euler Hermes, sees “a protracted period of sub-potential growth led by weak leadership and policy slippages” as the main risk to a return to robust economic dynamics.

Author:Nihad Ahmed, Economist

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In October, activity picked up in Kenya’s private sector following a deterioration in the previous month, as reflected by a rise in the Purchasing Managers’ Index (PMI), produced by IHS Markit and Stanbic Bank.

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